May 11, 2012

FDIC Outlines SIFI Resolution Process

The Federal Deposit Insurance Corp.’s current thinking for resolving a large, systemically important financial institution is to place the parent company into receivership and pass its assets, principally investments in its domestic and foreign subsidiaries, to a newly created bridge holding company, acting chairman Martin Gruenberg said.

Speaking May 10, 2012, to the Federal Reserve Bank of Chicago Bank Structure Conference, Gruenberg explained that this system would allow subsidiaries that are equity solvent and contribute to the firm’s value, to remain open. Consequently, “we expect that qualified financial contracts will continue to function normally as the termination, netting and liquidation will be minimal,” he said.

The bridge holding company will act as an interim step in the conversion of the failed firm into a well-capitalized private sector entity, Gruenberg said. “We believe this strategy holds the best possibility of achieving our key goals of maintaining financial stability, holding investors in the failed firm accountable for the losses of the company, and producing a new, viable private sector company out of the process,” Gruenberg remarked.

In terms of international subsidiaries of U.S. firms, Gruenberg noted that the FDIC is actively reaching out on a bilateral basis to the foreign supervisors and resolution authorities with jurisdiction over the foreign operations of key U.S. systemically important financial institutions. Noting that a large concentration of U.S. overseas operations are based in the UK, Gruenberg said “substantial progress” had been made by both sides in understanding how possible U.S. resolution structures might be treated under existing UK legal and policy frameworks.

Gruenberg stressed that developing a credible capacity to place a systemically important firm into an orderly resolution process “is essential to subjecting these companies to meaningful market discipline.” Without this, these institutions “create an expectation of public support to avert failure,” allowing them to take on even greater risk, Gruenberg said.